Out-Law Analysis | 22 Jun 2015 | 4:28 pm | 4 min. read
It is increasingly difficult to miss the FCA's emphasis on changing the culture in financial firms. Some reference to culture changes appears in almost every market study, thematic review, proposal and piece of guidance emanating from the regulator since its inception.
The FCA has emphasised that the culture of a firm must come from the top, set by the boards and senior management and not just those working in compliance. The regulators will be looking to senior executives to establish the right culture and to lead by example, and to ensure that in all their business decisions and messages the intonation on culture is clear to the rest of the firm.
Cultural change is the motivating force behind a number of regulatory projects, in particular the senior insurance managers' regime (SIMR). These proposals make it even more obvious that the FCA will pay particular attention to how board executives are dealing with this issue. But, as the recent case involving the Bank of Beirut has shown, there is an ongoing focus by the FCA on individuals at all levels.
Changing culture for the better features high on the FCA's agenda for 2015/16, as set out in its recent business plan. While this will not be an overnight fix, the FCA will be looking for evidence of continuous improvement and steps being taken to address cultural failings. As such, there are thematic reviews set for the next financial year which will look specifically at cultural change programmes, beginning with retail and wholesale banks.
The FCA itself was established as a reaction to the global financial crisis which threw the financial sector into turmoil, and during which considerable public trust was lost. Many would argue that firm culture played a large part in this; and not only during the global crisis but during what ensued thereafter. The examples are plentiful: from PPI and card protection mis-selling to the LIBOR and forex scandals.
Perhaps the most dramatic example of the regulator's approach to cultural change came last November, when the FCA issued fines and industry bans against three former senior directors with insurer Swinton after holding them responsible for a sales culture within the company that one year previously had cost it over £7 million in fines. But the big question for insurers is how to change the culture that has been embedded for a number of years into something that, as FCA chief executive Martin Wheatley has said, is "genuinely different from [that] pre-crisis"?
For firms, each decision that is now made must include some form of quality assurance check that considers the impact on firm culture. In other words, is this the right decision to be made, not only because it is within the firm's remit technically or legally, but is it also morally sound and in the interests of consumers and other market participants? Recently, for example, the FCA found that insurance companies were not being clear enough about the cost of paying premiums in instalments. On the face of it, you might not think this is necessarily a question of culture, but the FCA's view is that it is in relation to how a product is sold or communicated to the customer.
The desire for transparency and accountability arises from the public's expectation that individuals should be held accountable for their actions. Since October 2013, the FCA has been able to 'name and shame' firms and individuals suspected of misconduct in warning notices – something that the regulator maintains will guarantee enhanced consumer protection and enrich the integrity of the UK financial system.
The senior insurance managers' regime
The SIMR will apply to senior managers in controlled functions or those who have responsibility for certain 'key' functions - put simply, those who are running insurance companies. It will require firms to provide a governance map setting out its management and governance arrangements, accompanied by a statement of responsibility for each senior manager. It will also create a new code of conduct with rules built around fitness and propriety, developing the firm's culture and standards and embedding those standards in the day to day management of the firm.
It has been clear from the outset that the new regime for insurers will not be identical to that for banks. The main differences between the two regimes are interesting and important, and include no presumption of responsibility or criminal offence of recklessly taking a decision causing an institution to fail for insurers; and no remuneration deferral clawback provisions. However, although these are not currently being proposed, they may well follow after being tested on the banks and the Prudential Regulation Authority (PRA) is looking for suitable alignment of the conduct standards for individuals at both insurers and banks.
Further, whilst there may not be a similar presumption of responsibility for insurers, the regulator will still be likely to start from the position that where an individual takes responsibility for an area or an activity then that individual will be the first to face questions in relation to perceived failures in that area. It would not be surprising if the regulators expect a similar standard of proof and onus on senior individuals in insurance to show what steps they have taken in order to rebut their responsibility for those failings, even if the FCA or PRA are not able to prosecute.
An ongoing focus on individuals
However, this accountability drive is not just directed at senior management. The recent case involving the Bank of Beirut demonstrated that although the regulator will be sympathetic to those in compliance roles who are largely governed by senior management, compliance officers have their own regulatory obligations to the FCA as 'approved persons' and their obligation to report to and cooperate with the regulator overrides any obligations that they have to senior management.
Again, this contributes to the overall culture of the firm, where greater candour and the ability of individuals to raise concerns without fear of reprisal are being encouraged. The challenge for managers will be to make sure that the message is not diluted as it works its way down to the firm's everyday practices and those that are interacting with customers on a daily basis.
As the FCA has acknowledged, all of this will take some time to properly implement so that insurers are ultimately in the position where cultural change is no longer seen as an additional layer of compliance but rather something that is integrated and embedded into every single decision-making process that the firm undertakes. Until then, we can expect to see the continued use of cultural failings as a contributory and aggravating factor when the regulator comes to decide on cases and sanctions.
Elena Elia is a financial regulation and enforcement expert at Pinsent Masons, the law firm behind Out-Law.com.